Debt serviceability restrictions
The Reserve Bank - Te Pūtea Matua is consulting on debt serviceability restrictions (DSRs) on residential mortgage lending. We are seeking feedback on the merits and potential design of two types of DSRs: restrictions on debt-to-income (DTI) ratios, and a floor on the test interest rates used by banks in their serviceability assessments.
DSRs are macroprudential policy tools. We use macroprudential policy to reduce systemic risk associated with ‘boom-bust’ cycles in which the financial system amplifies a severe downturn in the real economy. This in turn helps us to meet our statutory purpose of “promoting the maintenance of a sound and efficient financial system”, as set out in section 1A and Part 5 of the Reserve Bank Act.
The first tool we are consulting on is a restriction on DTI ratios. DTI restrictions impose a cap on mortgage debt (or total debt of a borrower including mortgage debt) as a multiple of income. We are seeking feedback on the potential impacts of a DTI, along with provisional views on design issues that would need to be decided before a DTI could be implemented. These issues include the treatment of different types of income and debt; whether exemptions and speed limits should apply to DTI restrictions; and the potential calibration of a DTI cap.
The second tool we are consulting on is a floor on the test interest rates that banks can use in their serviceability assessments. In carrying out their debt serviceability assessments, banks stress test the ability of borrowers to continue repaying their loans if interest rates rise to a certain level (the ‘test rate’). By placing a floor on the test rate we set a minimum buffer that all borrowers must meet regardless of bank, providing additional protection for the financial system should interest rates rise.
These two options are not mutually exclusive, but a regulated DTI limit would take considerably longer to implement – feedback from the industry suggests six to nine months, once key design issues are agreed. Test rate floors could be implemented more quickly, and hence could potentially be used as a provisional tool while DTI limits are operationalised.
Consultation closes at 5pm on 28 February 2022.